Jurisdiction - Singapore
Reports and Analysis
Singapore – Clause Cannot Oust Court’s Jurisdiction To Grant Injunction On Unconscionability Ground.

4 February, 2015

 

 

In this article, we look at a recent High Court decision involving an “on demand” performance bond. The threshold issue was whether a contractual clause, which prohibited the beneficiary from making any call on the bond except in the case of fraud, was unenforceable. Can such a clause oust the Court’s jurisdiction to grant an injunction on the ground of unconscionability?

 

Facts
 
In CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd and another [2014] SGHC 266 (“CKR Contract Services”), a property developer, Asplenium Land Pte Ltd (“Asplenium”), engaged CKR Contract Services Pte Ltd (“CKR”) as its main contractor to develop 3 blocks of residential flats. The contract required CKR to provide a performance bond (“Bond”) for the sum of SGD 8,806,383.80 i.e. 10% of the total contract sum. The second defendant, a bank, issued the Bond.
 
Dissatisfied with CKR’s performance under the contract, Asplenium issued a notice of termination and called on the Bond. CKR applied ex parte for, and obtained, an interim injunction to restrain payment under the Bond.
 
Subsequently, the High Court heard CKR’s application for an injunction to restrain Asplenium from calling on the Bond on the ground that the call was unconscionable.
 
Summary Of Decision
 
The High Court dismissed CKR’s application and found that Asplenium was entitled to call on the Bond. Two issues arose for the Court’s consideration.
 
Issue 1: Enforceability Of Ouster Clause
 
A preliminary issue was whether Clause 3.5.8 of the preliminaries to the main contract was unenforceable as being an attempt to oust the Court’s jurisdiction. The High Court held that Clause 3.5.8 was unenforceable.
 
Clause 3.5.8 states:
 
“In keeping with the intent that the [Bond] is provided by the [plaintiff] in lieu of a cash deposit, the Contractor agrees that except in the case of fraud, the Contractor shall not for any reason whatsoever be entitled to enjoin or restrain:
 
(a) the [first defendant] from making any call or demand on the [Bond] or receiving any cash proceeds under the [Bond]; or
 
(b) the [second defendant] under the [Bond] from paying any cash proceeds under the [Bond]
 
on any ground including the ground of unconscionability.” [emphasis in original]
 
The High Court rejected Asplenium’s contention that based on Clause 3.5.8, CKR could only apply for injunctive relief on the ground of fraud. This was because Clause 3.5.8 was “an ouster of the jurisdiction of the court” and was therefore “void and unenforceable as being contradictory to public policy”.
 
Although the District Court in Scan-Bilt Pte Ltd v Umar Abdul Hamid [2004] SGDC 274 had given effect to a similar clause that prevented the obligor from seeking injunctive relief on any ground other than fraud, the High Court disagreed with both its reasoning and conclusion for three reasons.
 
Firstly, endorsing Clause 3.5.8 would “severely curtail the court’s jurisdiction and discretion to grant an injunction and would therefore be contrary to public policy”. The High Court agreed with the general principle enunciated in a recent decision by the Federal Court of Malaysia that a court was free to exercise its jurisdiction and discretion on whether to grant or dismiss an application for injunctive relief even if the parties attempted to insert an ouster clause.
 
Secondly, it was well-established that the court’s power to grant injunctions flowed from its equitable jurisdiction and could not be “circumscribed or curtailed by clauses in a contract”.
Finally, there were important policy considerations, in particular the concern of abusive calls on performance bonds, which underpinned the unconscionability doctrine and could not “be lightly brushed aside by an agreement made by parties”.
 
Issue 2: Whether Call on the Bond was Unconscionable
 
As Clause 3.5.8 was unenforceable, the second issue was whether Asplenium’s call on the Bond was unconscionable. In this regard, the High Court referred to the following key principles:
 
  • Unconscionability includes elements of abuse, unfairness and dishonesty and the applicant has to establish a strong prima facie case of unconscionability;
  • Unfairness per se does not necessarily amount to unconscionability although in every instance of unconscionability there will be an element of unfairness; and
  • The existence of genuine disputes does not necessarily mean that the call is unconscionable; mere breaches of contract would not by themselves be unconscionable.
 
On the facts, CKR failed to establish a strong prima facie case of unconscionability, as CKR had not adduced sufficient evidence to show that Asplenium had behaved unconscionably.
In particular, the High Court dismissed CKR’s argument that Asplenium had to prove “some degree of impecuniosity” before calling on the Bond. No such requirement existed as the Bond was an on-demand performance bond.
 
Moreover, even if Asplenium knew that calling on the Bond would have a “severe impact on [CKR’s] cash flow and asset management”, the High Court reiterated the point made in Tech-System Design & Contract (S) Pte Ltd v WYWY Investments Pte Ltd [2014] 2 SLR 1309 that financial hardship did not suffice to prevent a call on the Bond. This was because the focus of the court’s inquiry was on “the beneficiary’s alleged unconscionable conduct and not the purported effect of financial hardship that it may have on the obligor”.
 
Furthermore, CKR’s claims as to whether Asplenium had validly terminated the contract were genuine disputes over the alleged breaches by Asplenium and did not constitute a strong prima facie case of unconscionability.
 
The High Court concluded that there was “little substantiation or basis” for CKR’s attempts to “impute bad faith, unfairness and ill-will to [Asplenium’s] actions”.
 
Comment
 
The CKR Contract Services decision indicates that where an ouster clause is relied upon to deny the obligor injunctive relief, policy considerations underlying the court’s power to grant injunctions take precedence over the principle of party autonomy. This holding is to be welcomed as it reinforces the safeguard of the Court’s jurisdiction to intervene at the interlocutory stage where there is prima facie evidence of unconscionability when a call is made on the Bond. Also, CKR Contract Services reflects the current judicial stance of the high threshold that the obligor would need to satisfy in proving its case that the beneficiary’s call was unconscionable.
 
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